There’s a common misconception that giving your house to your kids is beneficial for Medicaid, taxes, etc. Unfortunately, this is not necessarily true. As with most asset transfers, there are many factors that come into play. Before you transfer ownership of your home, consider these 3 important things.
You Might Be Ineligible for Medicaid
Any real estate assets transferred within 5 years of applying for Medicaid will be closely scrutinized. Whether it’s a gifted transfer or entered as a sale (for a below market price), it will be closely reviewed. Medicaid could impose a penalty period, during which you are not eligible for benefits. This period could extend for years and cost you significant money in paying for your own care. Before gifting a house to your kids, consult with one of our attorneys. There are certain circumstances under which you can make a transfer and still qualify for Medicaid.
You Will Lose Control of the Asset
Transferring ownership of a property means relinquishing all control and decision-making for that asset and the equity within it. You may assume that your children will use the equity to provide for your care, but other circumstances may jeopardize that. For instance, if you gift a house to your child and then he/she subsequently gets divorced, it could be divided as part of the divorce settlement. In most cases, gifting a house to your kids while you are still living is not the best idea. There are other estate planning instruments that can accomplish your goals without such high risk.
Your Children May Pay More in Taxes
Another consideration before gifting a house to your kids are the tax consequences. Your children could end up paying more capital gains tax when they go to sell that house. Why is that?
Normally, when a property is inherited and then sold, taxes are calculated based on the difference between the sale price and the market value of the home at the time of inheritance. When a property is gifted, the sale price is compared to the original purchase price of the home (Donee’s basis).
Here’s an illustration:
$200,000 Original Purchase Price of Home
$300,000 Value at Time of Transfer to Kids While You Were Living
$400,000 Value at Time of Your Death
$440,000 Sale Price
Scenario 1: $440k – $400k = $40k subject to capital gains tax
Scenario 2: $440k – $200k (original purchase price) = $240k subject to capital gains tax
Given that you probably purchased the home many years ago and home values have increased significantly since then, gifting a property while you are living will result in much higher capital gains taxes for your children.
Is Gifting a House to Your Kids a Good Idea?
Before you make any major decisions regarding your assets and your estate, it’s important to consult with a Massachusetts estate planning attorney. Gifting a house to your kids can be beneficial under certain circumstances and harmful under others. It also may not accomplish the goals that you imagined. Your estate plan should be reviewed as a whole and consideration to all facts and variables. Contact our team today to discuss what options will work best for you when it comes to your home, your children, and your medical benefits.